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The Impact of Short-Selling in Financial Markets

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The Impact of Short-Selling in Financial Markets CORE Metadata, citation and similar papers at core.ac.uk Provided by Sydney eScholarship The Impact of Short-Selling in Financial Markets Steven Lecce A dissertation submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Discipline of Finance Faculty of Business and Economics University of Sydney CERTIFICATE I certify that this thesis has not already been submitted for any degree and is not being submitted as part of candidature for any other degree. I also certify that the thesis has been written by me and that any help that I have received in preparing this thesis, and all sources used, have been acknowledged in this thesis. Signature of Candidate ………………….......... Steven Lecce 2 Acknowledgements First and foremost, I would like to extend a special thanks to my supervisor, Andrew Lepone. His assistance, feedback and insightful comments throughout the years have been nothing short of exceptional and I greatly appreciate his efforts. His willingness to be available at any time when I needed some guidance has significantly enhanced the overall quality of this dissertation. Special thanks to Reuben Segara for providing guidance in the initial stages of choosing a topic and for his guidance throughout the years. Also thanks to Michael McKenzie and Alex Frino for their words of wisdom and help during the process. I would also like to thank Kiril Alampieski, Angelo Aspris, James Cummings, Anthony Flint, Peng He, Jennifer Kruk, George Li, Mitesh Mistry, Rizwan Rahman, Brad Wong, Jeffrey Wong, Danika Wright and Jin Young Yang for their friendship and insightful comments along the way. Their support and friendship has made the entire experience considerably more enjoyable than I could have ever imagined. Most importantly, I would like to thank my wife Laura for putting up with me during the entire process. Without her support I would not have made it. 3 Table of Contents 1 LIST OF TABLES ........................................................................................................ 7 2 LIST OF FIGURES ...................................................................................................... 9 3 PREFACE .................................................................................................................... 10 4 SYNOPSIS ................................................................................................................... 11 1 CHAPTER 1: INTRODUCTION .............................................................................. 15 1.1 Short-sale constraints and market quality: Evidence from the 2008 short-sale bans .............................................................................................................................. 17 1.2 The impact of naked short-selling on the securities lending and equity market ... 21 1.3 An empirical analysis of the relationship between credit default swap spreads and short-selling activity ..................................................................................................... 25 1.4 Summary ............................................................................................................... 29 2 CHAPTER 2: LITERATURE REVIEW.................................................................. 30 2.1 Short-selling: Description and motivations .......................................................... 31 2.1.1 Origins of short-selling .................................................................................... 31 2.1.2 Types of short-selling ...................................................................................... 32 2.1.3 Motivations for short-selling ........................................................................... 34 2.2 Pricing implications of short-selling ..................................................................... 37 2.2.1 Theoretical predictions .................................................................................... 38 2.2.2 Empirical findings ........................................................................................... 40 2.2.3 Information content of short-selling ................................................................ 55 2.3 Impact of short-selling on market quality ............................................................. 66 4 2.3.1 Impact on volatility .......................................................................................... 67 2.3.2 Impact on liquidity .......................................................................................... 72 2.4 Naked short-selling in equities markets ................................................................ 74 2.5 CDS markets ......................................................................................................... 76 2.5.1 CDS market details .......................................................................................... 76 2.5.2 CDS pricing ..................................................................................................... 81 2.5.3 Credit spread determinants .............................................................................. 85 2.5.4 CDS determinants ............................................................................................ 86 2.5.5 Other studies using CDS spreads ..................................................................... 93 3 CHAPTER 3: SHORT-SALE CONSTRAINTS AND MARKET QUALITY: EVIDENCE FROM THE 2008 SHORT-SALE BANS ........................................... 97 3.1 Introduction ........................................................................................................... 97 3.2 Hypothesis development ....................................................................................... 98 3.3 Review of short-sale bans ................................................................................... 101 3.4 Data and method ................................................................................................. 104 3.5 Results ................................................................................................................. 112 3.5.1 Abnormal returns ........................................................................................... 112 3.5.2 Market quality: Descriptive statistics ............................................................ 121 3.5.3 Market quality: Pooled cross-sectional regressions ....................................... 126 3.6 Summary ............................................................................................................. 134 4 CHAPTER 4: THE IMPACT OF NAKED SHORT-SELLING ON THE SECURITIES LENDING AND EQUITY MARKET ........................................... 136 4.1 Introduction ......................................................................................................... 136 4.2 Hypothesis development ..................................................................................... 137 4.3 Institutional settings ............................................................................................ 140 4.3.1 Short-selling regulation on the ASX ............................................................. 140 5 4.3.2 Mechanics of short-selling on the ASX ......................................................... 141 4.4 Empirical analysis ............................................................................................... 144 4.4.1 Impact on stock returns.................................................................................. 145 4.4.2 Impact on volatility and liquidity .................................................................. 152 4.4.3 Additional tests .............................................................................................. 170 4.5 Summary ............................................................................................................. 184 5 CHAPTER 5: AN EMPIRICAL ANALYSIS OF THE RELATIONSHIP BETWEEN CREDIT DEFAULT SWAP SPREADS AND SHORT-SELLING ACTIVITY ................................................................................................................. 186 5.1 Introduction ......................................................................................................... 186 5.2 Hypothesis development ..................................................................................... 187 5.3 Data ..................................................................................................................... 188 5.3.1 CDS ............................................................................................................... 188 5.3.2 Short-selling .................................................................................................. 190 5.3.3 Explanatory variables .................................................................................... 192 5.4 Model specification and empirical results .......................................................... 195 5.4.1 Summary statistics ......................................................................................... 196 5.4.2 Univariate regression analysis ....................................................................... 199 5.4.3 Multivariate analysis...................................................................................... 200 5.4.4 Changes in CDS spreads................................................................................ 205 5.4.5 Additional tests .............................................................................................. 206 5.5
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